Invesco Canada blog

Insights, commentary and investing expertise

Smart cars are getting much smarter

Three years ago, we wrote about “your car in 5 years’ time,” but it is already time for an update. Voice commands have been fully integrated into new cars, and they’re capable of doing much more than the commercials demonstrating “Alexa, start my car” promised. Making phone calls hands-free in the car seems normal now, and so progress goes – the once fantastic and whimsical ideas becoming commonplace.
     

The auto companies are serious about innovation. Research and development (R&D) dollars spent in the auto industry were close to $130 billion USD in 2018, only trailing R&D dollars spent in the Healthcare and Information and Communications Technology sectors.2

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The coronavirus impact on fixed income markets


March 16, 2020
Subject | Coronavirus impact | ETFs | Industry views

Macro impact
 
The spread of the coronavirus globally has continued unabated in recent weeks. The combination of “business as usual” in Europe and the U.S. and limited testing has exacerbated the issue and increased uncertainty regarding the extent of the outbreak and the ultimate path the outbreak will take. As policymakers take more aggressive measures to control the spread of the virus, we will likely see a large impact on global growth. As the extent of the outbreak has expanded, investors have had to price in a larger impact on growth over a longer period.
 
Invesco Fixed Income expects Q1 growth in the U.S. and Europe to be weaker than expected and Q2 growth to be significantly negative, as these economies are hit by fear and the impact of measures implemented to contain the virus. The path forward also remains very uncertain, which is a headwind for markets.
 
China provides a model for us to think about what lies ahead. China implemented strong measures to control the virus, which has hit the economy badly in Q1. China has now controlled the outbreak and is in the process of returning to work. Once the level of daily infection peaked, the process of returning to work started. Infections in the U.S. and Europe are still rising, and it is likely the epidemic will take a while to peak in these regions. It is the impact on growth and uncertainty around the virus propagation that is causing current market action.
 
It is very important to acknowledge that we believe this is a fundamentals-driven correction, which makes it very different than a financial crisis. The resolution of this situation will likely take time as we watch the epidemic play out in the U.S. and Europe. Financial conditions-driven crises, such as the one in Q4 2018 and the Global Financial Crisis can be resolved quickly by central banks. In the case of fundamentals-driven crises, central banks can only ameliorate, not solve, them. We expect this market to follow a U pattern rather than a V.
 
We expect risk assets to continue to be volatile, and markets will likely take a while to bottom. U.S. interest rates have been the shock absorber, but there is little room for bonds to rally further, in our view, as we do not expect the U.S. Federal Reserve (Fed) to embrace negative interest rates. The Fed will likely cut rates close to zero, but we expect the yield curve to remain positively sloped. Lower U.S. interest rates will likely erode the interest rate advantage of the dollar versus other developed market currencies, which will likely weigh on the dollar going forward versus other developed market currencies.

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Embarking on the ESG journey


March 9, 2020
Subject | ETFs | Industry views

Once considered a niche market within the investment universe, strategies that integrate environmental, social and governance (ESG) concerns into their investment process have hit the mainstream.
 
This has been driven by several social movements and the recognition that there is still a great deal of work to be done, particularly from a financial standpoint, to address issues ranging from climate change and gender equality to indigenous rights.
 
Investors who are just beginning to incorporate ESG elements in their portfolio may prefer a passive strategy for a few reasons.
 
First, a passive approach may offer exposure to a broad large cap segment in the market, which might make it suitable as a core portfolio holding.
 
Second, you get a level of transparency into which ESG elements are being incorporated alongside the other financial considerations for building the portfolio.
 
For an ETF, the rules are transparent and public, so the investor can evaluate the strategy before buying into it.

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The Evolution of ESG


February 27, 2020
Subject | ETFs | Industry views | Invesco

Responsible investing is becoming more mainstream as demand increases for strategies that incorporate ESG factors into their investment process. The drivers come from regulatory pressure, demographic shifts such as the growing influence of millennials, and the greater availability of corporate data on ESG issues. More generally, investors want their investments to align with their own values, especially if it offers the potential for better risk-adjusted performance.

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Brexit: The consequences of economic policy uncertainty

Economic policy uncertainty has for decades been recognized by economists as having the potential to negatively impact economic growth. In 2015, economists Huseyin Gulen and Mihai Ion found that economic policy uncertainty has a strong negative correlation to business investment.1 This built on previous research from the 1980s that showed that high uncertainty gives firms an incentive to delay investment decisions, especially in situations where reversing an investment decision can be costly.2

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Populist, nationalist movements are on the rise: What could this mean for the global economy?

An informal Invesco poll of North American institutional investors recently revealed that geopolitical risk was a top concern for 2019. And they’re not the only ones worried: European Central Bank President Mario Draghi recently noted that the risks to the downside have increased, blaming, among other things, “the persistence of uncertainties related to geopolitical factors and the threat of protectionism…” In his annual letter to investors in January 2019, Seth Klarman of Baupost warned of the threat of geopolitical disruption: “Social frictions remain a challenge for democracies around the world, and we wonder when investors might take more notice of this.”

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Three themes we’re watching in 2019, and their implications for institutional investors

As we look toward the opportunities and challenges to come in 2019, our base case is positive, with the expectation that global economic growth is likely to decelerate modestly, yet remain solid. We expect major economies to slow from above-trend growth toward on-trend growth, which should contain inflation, as major central banks normalize policy.

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Fixed income: Gauging the ripple effects of softening economic growth

Key takeaways

  • In the US, we believe peak levels of growth are behind us and expect to see slowing in the second half of 2019.
  • Outside the US, there are also signs of softening growth.
  • Inflation is likely to increase somewhat, but we do not believe that wage inflation will be significantly passed through to consumer prices in 2019.

Global macro

In the US, we believe peak levels of growth are behind us, although we expect annual growth of around 2.75% to persist through the first half of 2019 before slowing.  Fiscal stimulus is still having a positive effect on growth, but will likely wane in the second half of 2019.  In addition, the positive financial tailwinds that have been driving the economy may turn more neutral as monetary policy continues to tighten.  Therefore, while consumer spending will likely be additive to growth in the first half, as the boost from tax cuts winds down, the question is how much will the consumer want to spend thereafter? Consumption has grown at an unsustainably high level, in our view, over the last several quarters, driven by stronger consumer confidence and tax cuts. A meaningful slowdown in consumption could have negative implications for broader growth.  These effects mean that risks to economic growth are higher in late 2019 than they have been in previous points in the cycle.

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Global markets, financial district

U.S. growth equities: Change is the fuel for growth

Key takeaways

  • If historical precedent holds up, there is still room to be positive on equities as we move into 2019 and on to early 2020.
  • The key is to identify companies that can gain market share from technology-enabled advantages in their business model or disruptive shifts in consumer behavior.
  • We highlight several areas where technology is enabling disruption and creating opportunities.

As we look forward into 2019, we believe there is continued potential for positive US equity returns, but slowing economic growth may mean more frequent downhills — and more investors losing their way — than during the market’s climb of recent years.  Observing the weight of the evidence, we have moved into a late-cycle environment.  In our view, the path forward will not rely on choosing growth versus value, or small-cap versus large-cap. We believe it will rely on identifying “share-takers” (companies that can gain market share from technology-enabled advantages in their business model and in consumer behavior) and avoiding “share-losers” (companies that have simply been buoyed in recent years by the expanding economic environment).

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Tech display, Discover conference

Global economy: Three themes to watch in 2019

Key takeaways

  • We believe economic growth divergence is likely to continue to some extent.
  • Geopolitical disruption is leading to structural fragmentation.
  • The debt problem is widespread and is becoming more burdensome as rates rise.

As we look out to 2019, we believe there are three key themes that will persist into the new year.

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US national debt, treasury secretary

Exchange-traded funds: Strategies for mitigating the new risks of the new year

Key Takeaways

  • We see new risks on the horizon for both equity and fixed income investors, but there are various exchange-traded fund strategies that we believe can help.
  • We expect that a loss of profit momentum in 2019 could lead to increased volatility and correlations, and we believe that the Low Volatility and Quality factors may perform relatively well in such an environment.
  • With the overall climate still tilting in the direction of higher rates in 2019, one way to potentially manage that risk is to build bond ladders using defined-maturity bond funds.

In the new year, we see new risks on the horizon for both equity and fixed income investors. Equity markets are anticipating a loss of momentum for corporate profit growth. And, for the first time in 12 years, fixed income investors are forced to wrestle with the challenge of navigating a multi-year upward trend in interest rates at both the short and long end of the bond universe. There are various exchange-traded fund strategies that we believe can help with both challenges.

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Walking sculpture, Magic Mountain, Angerpark

Multi-asset: The prolonged global expansion could continue if fiscal and monetary policies remain supportive

Key takeaways

  • We take a two- to three-year view of the world when building our central economic thesis.
  • We believe it is vital to consider both cyclical and structural forces in building this thesis.
  • We believe that all of our ideas can make a positive return in our central economic scenario to ensure we have ideas that can excel in various economic conditions. However, it is important to note that our ideas do not derive from it.

2018 has been a relatively volatile year, however this has been limited to bouts of volatility while, rather surprisingly, levels of market volatility overall have remained fairly subdued.

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Alternatives: Alternatives may be an answer to challenging investment environments

Key takeaways

  • Expect lower equity returns, increased volatility and rising interest rates in 2019.
  • Alternative investments can help investors weather a more challenging environment.
  • Investors need to be proactive and avoid the mistake of adding alternatives reactively.

Following an idyllic 2017, when equity markets were characterized by strong returns and low volatility, we were reminded in 2018 that markets are often volatile and can go down just as easily as up. In 2019, I believe investors should be preparing themselves for lower equity returns, increased volatility and rising interest rates. Given this outlook, investors would be well-served (in my opinion) to consider the addition of alternative investments to their portfolios.

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Wall Street Bull, Statue

Real estate: The outlook for real estate fundamentals is positive, but risks remain

Key takeaways

  • Risks today are crystallizing; many are more global in nature.
  • Pricing remains attractive; however, yield/cap rate compression is largely behind us.
  • Total returns in 2019 are likely to be driven by net operating income growth.

Strong growth in developed economies should continue to support favorable real estate fundamentals in the near term. The baseline scenario remains very positive, and global listed equities’ earnings yields are providing a positive spread over local government bonds, a sign that real estate is still fairly priced. Yet macro risks to the outlook are perhaps now greater today than in prior years; many are increasingly global in nature. They include rising populism, an escalation of the US-China trade war, a monetary policy normalization misstep, a disorderly Brexit or a China debt crisis.  Should any one of them materialize, it would have the potential to derail the global growth outlook to a measurable degree.

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city planning, real estate

Chinese equities: What is in store for Chinese equities in 2019?

Key takeaways

  • We believe Chinese equities represent some of the best structural opportunities across global markets.
  • Following the correction in 2018, we believe the risk-reward picture has turned exceptionally favorable.
  • We believe corporate fundamentals will remain strong given solid support from the domestic market.

There has been a disconnect between sentiment and fundamentals when it comes to Chinese equities in 2018. Market sentiment has been weak (driven by the changing relationship with the US and moderating growth), while economic fundmentals remained decent. China was on track to deliver its growth target despite moderation, widely known as a result of economic transitioning towards high quality growth.

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Technology: A look at the technologies we believe will define 2019

Key Takeaways

  • Artificial intelligence applications will continue to improve, with the ability to digest and analyze ever-increasing amounts of data to drive a better customer experience.
  • Companies will begin investing more heavily in the reduced latency, enhanced security and bandwidth savings of edge computing.
  • Blockchain and token economics diffuse into the early adopters.
  • Companies’ abilities to attract and retain diverse and skilled talent in these emergent technologies, including their physical space and location strategies.

Artificial intelligence and the data wars

The cat is out of the bag

Artificial intelligence (AI) applications are likely to have a profound impact on businesses, markets, and global economies in 2019 and beyond. At the micro level, machine learning and the vast (and growing) amounts of underlying data should continue to improve client experiences through predictive analytics and personalization.

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Humanoid robots, innovation

Global equities: A decade after the global financial crisis, a mixed bag of growth

Key takeaways

  • The overvaluation of structural growth stocks, such as technology stocks, is unsustainable, in our view.
  • For markets used to easy money, the transition to a more ‘normal’ period for central banks is likely to pose a challenge.
  • The European market looks a lot more attractively valued than the US, especially those stocks more sensitive to the direction of the economy, such as banks.

The outlook for global growth has become more mixed. While the synchronised economic expansion that I discussed in this piece last year is less widespread today, it should still be sufficient for corporate earnings to grow. Amid continued regime change – quantitative easing has given way to quantitative tightening, and interest rates are rising – the US continues to press ahead, while there is less momentum elsewhere.

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European Central Bank

Want to build smart cities? Then we need a new infrastructure financing model


November 30, 2018
Subject | Industry views | Institutional | Invesco | Macro views

What comes to mind when you hear the term “smart city”? It might be a clean and safe space where people and places are connected by digital technology. Or a place where self-driving cars take us around and pollution is a thing of the past. We all have a vision of what a smart city should be – but for most of us what we imagine is far removed from the cities we actually inhabit, with clogged roads, smoggy days, and outdated infrastructure.

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